What’s the precedence for a “without precedence” situation? We’re about to find out.
“Without precedence.” We’ve heard the phrase (and variations) a lot in the news over the past few months of the COVID-19 pandemic situation. Of course, it means, different things to different people and different businesses. In the case of containership operators, the drop-in demand and subsequent blanking of services due to the pandemic, the implementation of IMO dictates, the consolidation of containership operators and boxship alliances (see charts), the dramatic drop in oil prices and the operational issues throughout the supply chain associated with the COVID-19 plague are for a lack of a better phrase, “Without precedence.”
In the pre-COVID-19 world, the implementation of the IMO sulphur cap mandates (see Peter Buxbaum page 15), the top-heavy consolidation of carriers and associated alliances or the impacts of the drop in bunker prices – one of the chief overheads for ocean carriers – would be the “lead” story but the COVID-19 pandemic has hijacked the narrative.
Idle Ships and COVID-19
Going into 2020 the containership operators had already placed a large number of ships into the “idle” fleet, not because of trading conditions but rather moving them to shipyards for the retrofitting of exhaust scrubbers to make the vessels IMO compliant with the sulphur cap mandate. However, with emergence of the COVID-19 pandemic eroding demand, the layups increased to record levels. Blank sailings became the de rigueur of the carrier Alliances much to the chagrin of shippers and port officials.
Simon Heaney, senior manager, Container Research and author of Container Insights Weekly for London-based Drewry Shipping Consultants, said in an interview with AJOT that there was “no gainful service for these ships and eventually [carriers] began reacting to the downside [influence on demand] and in early April the idle fleet hit 9.2% amounting to 2.1 million TEU close to the [percentage] for the 2009 crash but on a much larger fleet of 23 million TEU.”
Heaney also added that in the initial stages the layups were “clustered” in the smaller to mid-size containership classes but has since migrated to the larger sizes. Heaney says according to Drewry’s early April tally 880,000 TEU of the 2.1 million idled is in the 12,000 TEU and above range.
How many more containership ships will be taken out of service in the coming weeks or months is problematical. Ironically, with the current bunker prices so low and with the difference between normal bunker fuel with a high sulphur content and bunker fuel with a low sulphur content, the advantage has narrowed to a degree that retrofitting has lost its former economic allure. This puts the question of future additions and deletions to the idle fleet squarely as a question of supply and demand.
Supply Side: Top Heavy Ownership
It doesn’t take an economist to point out how “top” heavy ownership of the containership fleet has become over the last decade. A cursory look at the Top 75 Ocean Container Lines chart (sourced from Singapore-based shipping consultants Alphaliners’ Top 100) illustrates the concentration of ships and TEUs among the top seven carriers.
The Danish carrier Maersk tops the list with nearly 700 ships of nearly 4.2 million TEUs, closely followed by Swiss-Italian MSC (Mediterranean Shipping Company) with 567 ships at almost over 3.7 million TEU. These two mega-carriers are followed by China’s COSCO Group, France’s CMA-CGM, Germany’s Hapag Lloyd, Japan’s ONE (Ocean Network Express) and Taiwan’s Evergreen Line. This group of mega carriers owns between 476 ships to 194 ships ranging between 2.9 million TEUs to 1.2 million TEUs. This comprises all the containership ship carriers commanding over 1 million TEUs - with the next middle range of containership operators not even close in size (Taiwanese carrier Yang Ming Marine at nearly 600,000 TEU is next).
The difference in the fleet composition is dramatic. As Heaney explained, “It used to be that a carrier needed a reasonable percentage of the total fleet to get into the top twenty, now it takes less than 1% (.04%).”
Many of the remaining carriers are virtually unrecognizable to the public and even most shippers – carriers like Zhonggu Logistics, Antong Holdings, Sinokor, or X-Press Feeders Group - are often engaged in feeder services in the China or intra-Asian trades and attract little fanfare. “They’re almost mom and pop carriers and hardly register [when taken against the total fleet],” says Heaney.
Overall, the top seven containership operators now account for approximately, 78% of the TEUs for the entire (internationally trading) containership fleet. There has never been such a concentration of slots in so few hands since the very early days of containerization.
Descent into the maelstrom
How did it happen? How did so much of the container business end up with so few operators?
Carrier consolidation is just a normal part of the business (cycle) for shipping. But what makes this current situation different is the level of concentration of services with a little over a handful of carriers. This is due in part to the M&A activity over the last decade among the top tier of container carriers – the one through twenty – and secondly a robust orderbook for mega-containerships of 12,000 TEU to 20,000 TEU meant fewer but larger (more) expensive ships were being added largely within the top twenty container carriers.
The latest round of consolidation began in 2016 (not coincidentally occurring in line with the Hanjin bankruptcy which shocked boxship owners and shippers alike) with the merger of COSCO and CSCL (China Shipping Container Lines) and peaked with the integration of the Japanese box carriers NYK, MOL and K Line into the Ocean Network Express (ONE) early in 2018. Along the way APL was added into the CMA-CGM Group, Hamburg Süd was absorbed by Maersk Line and Hapag Lloyd reached a deal with UASC.
The ultimate rationale behind consolidation is to become more profitable, so the question for the top carriers is has consolidation worked? Aside from a short run in 2018, the answer is a resounding no. According to a recent report from Alphaliner, the industry is facing financial headwinds on a par with the Great Recession in 2009.
The report says blank sailings and layups “will hurt carriers’ operating cash flows and further weaken their fragile balance sheets.”
Alphaliner, using the Altman Z-scores, which measures the financial well-being by establishing an index range - lower than 1.8 as “very high” chance of insolvency, to 3.0 or higher as “unlikely” to fail, examined the 11 largest “public” companies. And the results were four carriers: Hapag Lloyd, Maersk Line, OOCL and Wan Hai Lines- had Z-scores of 1.72 to 1.92 points, with a score of 1.8 to 2.7 considered a “high risk.” And seven other carriers had scores of less than 1.3
While it can be argued that the COVID-19 pandemic is a “Black Swan” event so out of the ordinary as to be beyond planning, such was also the case in the 2009 Great Recession – a nose dive from which many carriers never fully recovered. In fact, the box carriers, large and small, have been in troubled waters for decades. Nearly, each crash in freight rates has been due more to a surplus of slots rather than a fall in demand.
So, what happens when demand begins to improve?
As a result, when a real fall in demand occurs, as is the case with COVID-19, there is little the carriers can do beyond withdrawing the ships from service, selling assets [for example, container terminals] when possible, and simply weathering the storm.
Dominique Von Orelli, global head of ocean freight at DHL Global Forwarding, in a reply to the AJOT wrote, “Currently we do not expect more blank sailings than what the carriers have already announced. In addition, volumes should slowly pick up by end of May, beginning of June and carriers will again release capacity to the market. [Editor’s Italics] However, this of course depends very much that we see a further stabilization in terms of the Coronavirus pandemic.”
Merger & Acquisition
Although the industry is under “financial distress,” it is unlikely the current conditions will trigger the same urge to merge that occurred in 2016 with the Hanjin bankruptcy kicking off an industry wide period of consolidation. Heaney believes there may be some “organic” consolidation through bankruptcy but little likelihood of an industry shaking merger among the top tier carriers. However, M&A activity among some of the mid-sized carriers is not out of the question. For example, PIL (Pacific International Lines) has been rumored to be on the block after a billion-dollar asset selloff in March – including six 12,000 TEU vessels to Seaspan (a company that specializes in chartering vessels back to containership operators) and Wan Hai. The carrier also exited from transpacific trade earlier this year, stating the company will be concentrating on “key liner markets in Asia, the Middle East, Africa, Oceania and South America.” COSCO has been widely rumored as a suitor although there could be other carriers in the mix.
The Israeli carrier Zim and Hyundai Merchant Marine have been mentioned at various times as possible targets but neither look like candidates in the foreseeable future with the depressed state of the industry.
Supply Side 2.0: The Boxship Orderbook
Despite the state of the industry the containership orderbook is still strong. However, even in the best of times what is ordered is rarely 100% delivered within the allocated year. And in the worst of times, orders are cancelled and deliveries postponed, which is a likely scenario for 2020.
Nonetheless, shipowners like Evergreen, Hyundai, CMA-CGM all have booked 400,000 TEUs or worth of vessel. MSC, the world’s number two carrier has over 200,000 while Yang Ming is just slightly under that mark (see Vessels on order chart). Many of the ships are larger than 12,000 TEU a number of them are 19,000 TEU and above, continuing the decades old trend of boxships getting bigger, even in down markets – a function of the “economies of scale” containership paradigm.
The Hyundai Merchant Marine orders are of particular interest as they have a number of 24,000 TEU vessels – the largest in the world - due for delivery (see Matt Miller’s story in Northwest Seaport Alliance). The first of HMM’s behemoths built by Daewoo Shipbuilding & Marine Engineering is scheduled for April 28th delivery. The carrier is scheduled to take delivery of all twelve 24,000-TEU container carriers by August, adding up 288,000 TEU to the 446,419 TEUs of existing tonnage. Should all the ships be delivered on time the HMM fleet would jump to 734,419 TEUs or 7th place in the overall rankings ahead of Yang Ming Marine Transport.
Supply Side 2.01: Alliances
Of course, the deployment of the majority of TEUs is through the three main shipping alliances: The Alliance [Hapag Lloyd, ONE, Yang Ming and HMM], Ocean Alliance [OOCL, CMA-CGM, COSCO and Evergreen] and 2M [Maersk Line and MSC]. The combined carriers represent the largest container operators one through nine (OOCL being part of the COSCO Group).
It is the first time such a small number of carrier “alliances” composed of relatively few carriers controlled the service rotations of so many slots (and tons of freight) and port calls. Taken together the alliance members operate over 19 million TEUs or roughly 83% of the world’s containership TEUs.
In the case of the HMM ships, the twelve new ships will be deployed in The Alliance’s newly revised Asia-North Europe route FE4. But the domino effect is felt elsewhere. HMM’s 14,000 TEU line haul will now be deployed on the Trans Pacific services through the Panama Canal to the US East Coast. Unfortunately for the Port of Boston, the size of the ships is too large for the Port and the Alliance has dropped the port from their rotation. And therein lies the rub, a change in one carriers’ deployments can detrimentally impact ports and shippers in ways that dropping a single carrier never could.
And the question is whether another round of alliance “consolidation” is in the cards? Heaney, doesn’t think so. “The carriers are at the upper end of what is permitted by ‘competition law’…they [the carriers] just had their EU block exemption renewed…and there are thresholds they can’t surpass and any major change in [carrier] shares wouldn’t be approved.” And this sentiment against a further condensing of market share would likely be echoed in both China and the U.S. as well.
Demanding Times
How and when demand returns is contingent on how fast the global economy can get back on its feet after the COVID-19 pandemic dissipates. Recently, U.K.-based Clarksons Shipping Consultants said seaborne trade could contract by 5% in 2020, the largest decline in over 35 years. DHL’s “Ocean Freight Outlook” for April noted, “Total container volumes handled at Chinese coastal ports dropped by10.1% in the first two months of 2020 compared to same period in 2019, with full year volumes expected to register negative growth rates for only the second time since1970.” A cursory look at the US figures (see Descartes-Datamyne charts) echoes the same story.
Most forecasts, whether it is the IMF, World Bank or the US Federal Reserve Bank, have lowered their forecasts for 2020 – in some cases showing negative growth and a recessionary period.
Undoubtedly, there will be a bump in demand as supply chains are renewed and lock downs are removed. At this writing, the timing is little more than a guess with some saying as early as May and others as late as the Fall. In either case, it is unlikely the bump will be large enough to offset the damage already done in 2020 to the global economy and to the bottom lines ocean carriers moving the goods.
